Written by

Detroit Free Press Business Writer

A federal judge today upheld a bankruptcy ruling preventing a major bond insurer from trapping Detroit’s casino tax revenue, a vital source of cash for city operations that was pledged as collateral on a disastrous Kwame Kilpatrick-era debt deal.

U.S. District Judge Bernard Friedman confirmed Bankruptcy Judge Steven Rhodes’ ruling last fall that Syncora cannot prevent the city from accessing the gambling taxes — an outcome that would wreck the city’s budget.

In an unusual move, the U.S. 6th Circuit Court of Appeals ordered Friedman to decide the case by Monday so that it has a chance to consider Syncora’s appeal. Friedman had delayed the case for about nine months while the city’s bankruptcy case proceeded.

Friedman ruled that the casino taxes are property of the City of Detroit despite the city’s 2009 decision to pledge the revenue as collateral to secure interest-rate “swaps” that were purchased in 2005 on a $1.4-billion pension debt deal.

Syncora had argued that the city gave up its property rights to the casino cash when it made the collateral pledge, among other nuanced legal arguments.

The bond insurer faces hundreds of millions of potential losses if Detroit emergency manager Kevyn Orr successfully implements his restructuring plan. The city argues that the Kilpatrick debt deal was a legal “sham” orchestrated to circumvent the state’s legal borrowing limits.

But Syncora and fellow bond insurer Financial Guaranty Insurance Co. argue that Detroit retirees benefited from the deal — because the cash was used to fund pensions — and that they are receiving unfair treatment compared with other creditors.

Detroit filed for bankruptcy protection under Chapter 9 a year ago, claiming debts and long-term liabilities of $18 billion.